BAT has announced the disposal of its factory and land for RM218.0m. We are neutral to slightly negative as the disposal price, which is the highest bid received, is lower than the ascribed market value. Post-disposal, a one-off gain of RM148.8m or RM0.52/share will be recognized; thus, no changes to our FY16EFY17E core net profits forecasts. Reiterate UNDERPERFORM with unchanged TP of RM48.70 as we remain cautious on the gloomy industry outlook and the challenges in protecting its market share.

Disposing factory and land. According to an announcement to Bursa Malaysia, BAT has entered into a conditional sale and purchase agreement (S&P) with LGB Properties (M) Sdn Bhd to dispose 2 plot of lands (industrial, leasehold) measuring 13.1 acres or 570.7k square feet together with the building, in which its manufacturing operations were carried out, for RM218.0m. The purchase price was arrived at, based on a “willing buyer willing seller” basis and is the highest bid received by way of a public tender exercise which was closed on 29 April 2016.

Fair and square. We are not surprised by the disposal of land as the Group has already indicated its intention to cease the manufacturing facilities in Malaysia earlier in March 2016. Meanwhile, we are neutral to slightly negative as the disposal price of RM218.0m is 17% lower than the market value of RM262.5m ascribed by property consultant. The disposal price translates into an average price of RM382/sf. As comparison, TIENWAH (NR) has recently disposed an industrial leasehold land (1km away from BAT’s land) measuring 3.2 acres at an average price of RM454/sf. However, we think the disposal price is fair being the highest bid received from a public tender exercise.

To net a one-off gain. Post-disposal, BAT will recognise net gain of RM148.8m or RM0.52/share while net asset value will rise to RM2.26 from RM1.74 as of 1Q16. The use of the gross cash proceeds of RM218.0m or RM0.76/share will be reviewed by the Group and BAT does not discount the possibility of declaring the proceeds as dividends. The Group is also granted the right to take tenancy of the land for 12 months immediately after the completion of S&P for a monthly rental of RM1.1m. We believe this is helpful to ensure smooth transition for the Group to phase out its manufacturing operations.

Still a tough puff. We maintain our negative and pessimistic stance on BAT as it is expected to face more headwinds not only from the sharp dip in legal industry volume (-30% as of 1Q16) following massive excise duty-led price increase in November 2015 (23%-26%) but also the fact that it is losing market share (by 2.3ppt to 58.7% in 1Q16 from 61.0% in FY15) due to the downtrading to cheaper cigarettes in the Aspirational Premium segment, a segment BAT is not strong in.

Disposal to spark little cheers. Meanwhile, we are also wary of the uncertainty over the new cost structure post-restructuring, which might cast an overhang on the share price. Prospect of special dividend is unexciting even if the Group distribute the full proceeds to shareholders as it only translates into a one-off dividend yield of 1.5% which we think is insufficient to compensate for the downside risk of gloomy industry outlook and the challenges of BAT to protect its market leader position.

No changes to our FY16E-FY17E core net profit as the gain will be recognized as one-off exceptional gain.

Maintain UNDERPERFORM with unchanged Target Price of RM48.70. Our TP is based on 17.9x PER FY17E, which is on par with -1.5 SD over its 5-year mean to reflect the bearish industry outlook and tough challenges faced by BAT.

Source: Kenanga Research - 9 Jun 2016